Rethinking CTRM – Part One

Adaptive - 9th January 2019

Those who trade, purchase or sell commodities invariably have, at a minimum, a need to track and manage those transactions, report to regulatory authorities and manage a variety of exposures. This is most usually achieved via a Commodity Trading and Risk Management solution (CTRM). Analyst firm, Commodity Technology Advisory LLC defines a CTRM software,

‘As that category of software applications, architectures and tools that support the business processes associated with trading energy and commodities. In the broadest sense, commodity trading means both the buying and selling of commodities, the movement and delivery of those commodities and associated risk management activities. It therefore comprises a broad set of functions that can vary considerably depending upon what commodities are traded, what assets are employed in the business, where those assets are located and what the company’s business strategy and associated business processes are.’[1]

The Scalable, Adaptive and Agile CTRM Solution Remains Elusive

The CTRM software category already has more than a 20-year history and there are still over 100 commercially available products[2]. Yet, despite some dominance of the top 5-6 vendors and CTRM products, the market for such software is somewhat immature, very dynamic and largely unsatisfied[3]with the commercially available solutions for a variety of reasons including, amongst others,

When dealing with several commodities, each has potentially vastly different quality characteristics that must be accounted for and different supply chains, making it extremely difficult to cater for all in a single all-encompassing solution,

Each commodity supply chain can employ many different types of asset subject to local regulatory and other constraints and adding further complexity to any solution,

Geographic differences including unique business processes, reporting and language requirements, etc. that must also be catered for,

Each supply chain involves representatives of multiple different industry segments (e.g. production, merchant, end use) each with its own business requirements,

Rapidly shifting business requirements including regulatory changes, shifting economic/trade patterns, industrial technology advances, geo-political conflict, development of new markets and products, and new ways of doing business mean that functional requirements are constantly shifting and morphing,

Software technology innovation is also a factor that vendors and buyers struggle with.

Today’s commodity markets also generate massive amounts of data. This presents another set of challenges for any CTRM solution as different types of users require different views on the same data and create extensions to that data. Vendors have attempted to address these challenges in a number of ways such as by designing customizable dashboards, allowing personalization of screens and reports throughout the solution and through the use of complex reporting tools and integration frameworks for consolidated reporting and analytics.

The need to view, query and work on data for different uses includes areas like, for example,

Regulatory reporting where different trades and transactions must be classified and reported in different formats to different jurisdictions,

Risk management that requires views with varying degrees of latency, depending on role. For example, near real-time position reporting, or PnL, may be required at different levels and by subject to different criteria; while the need to perform stress testing or run complex statistical simulations such as Monte Carlo VaR or similar will occur less regularly on an intraday basis or potentially overnight.

Different views on profitability to avoid circumstances where traders are paid a bonus on a profit that evaporates once all commercial activities are transcribed to the company’s books,

And many more.

The result of attempting to meet all of the different requirements for different types of users across multiple commodities and geographies has often been very large footprint monolithic solutions that become increasingly inflexible through time, expensive to implement and maintain and often, almost impossible to upgrade and keep current with rapidly changing business requirements. Alternative approaches have involved procuring best in class solutions for specific commodities, operation or geographic locations and then trying to build an overlay to gain a consolidated view for things like risk, regulatory reporting and so on. Another approach favored historically by larger firms has been to build custom solutions in house. However, these soon become subject to many of the same issues faced by the vendors.

Other issues faced by users of CTRM solutions include poor performance and aging technologies. Increasingly, users need real-time insights into data and operations, yet many key operations remain in the form of overnight batch jobs that may fail to deliver key and critical information on a timely basis. Overnight processing of position and PnL reports are a prime example. Many of the more ‘mature’ solutions have already been in existence for over a decade and reflect the technologies of the time sometimes employing aging user interface tools, databases and designs and would require an almost total rewrite to be deployed in cloud native fashion.

Adaptive Rethinks CTRM

Adaptive believes that real-time trading technology is fundamentally changing the way business is conducted within financial services, capital and commodity markets. It has extensive experience in designing, building and operating business led technology solutions utilizing leading edge technologies that includes CTRM and related commodity trading and risk management solutions. We believe that now is the time to fundamentally revisit how CTRM solutions are designed, built and delivered.

Recently, for example, Adaptive was engaged by a world-class agri-business corporation with global operations, including both domestic and international trade. Its business spans a number of functions such as trade capture or pricing in the front office, delivery of goods, fee management and back office concerns such as invoicing and payments. These global activities were managed in several distinct applications, with local customizations, making it complex to compute a cohesive picture of risk – indeed, it was not possible to get an accurate picture of Profit & Losses in real-time, so visibility was limited. Furthermore, those legacy applications did not allow efficient operations, they did not scale, controls were not sufficient and consistent business practices could not be enforced.

Adaptive has been implementing a new Commodity Management solution, encompassing CTRM (Commodity Trading and Risk Management) and Logistics functionality, that delivers the following value for this client,

A unified platform allowing for the implementation of coherent business practices globally,

Increasing visibility and control over risk, profits and losses,

Identifying profitable (and less profitable) centers of activity while growing by acquisition,

Promoting efficiency; reducing waste and redundancies,

Reducing the possibility of operational/regulatory issues.

As the commodity trading sector is experiencing massive change on both the technological and business fronts and as the velocity of digital adoption has increased in the CTRM space, the pace of trading has become faster and the amount of data informing decisions has exploded. Those trading commodities are striving to gain higher volumes of liquidity, volatility, and technological as well as competitive edges to figure out their market position globally and consequently determine their settlement period benchmarks in the rapidly transforming trade landscape. On the flip side, and as discussed above, the current vendors in the CTRM space are often wholly unsuited for this as a large portion of existing CTRM platforms are built on top of legacy technologies.

In approaching the problem, Adaptive brought its prowess in real time, event-driven trading systems expertise to build a bespoke digital business platform that allow traders to achieve a differentiating edge in the marketplace. Each step of the process through design, build and operate employed modern, proven but innovative approaches, and Adaptive built the platform using an agile, iterative process throughout the delivery. The operate service enables a delivered platform to be run in production by Adaptive, performing operational tasks, maintenance, and the support of keeping the platform up to date and running.

With its expertise and knowledge of all aspects of design, build and operate in the financial services space and now the CTRM and related commodity trading space, Adaptive sees a new paradigm evolving in terms of how CTRM solutions can and should be built. These may employ innovative User Interfaces, employ real-time, event-driven and other types of database management systems more aligned to the needs of real-time, data-rich businesses, different architectures that deliver business agility through time and design approaches that deliver incrementally the functionality sought by the user.

It is time to rethink the CTRM. Our next blog will explore a number of key concepts that Adaptive believe ought to be a part of that rethink.